Effect of Mexicos Automotive Industry on North American Economies - Essay Example

Effect of Mexico’s Automotive Industry on North American Economies Introduction Mexico has emerged as one of the leading recipient of manufacturing investments including in the automotive industry. In fact, according to Bureau of Economics and Business Affairs (2013), Mexico has gained a foothold in the world and has jumped to be the eighth world producer of automobiles in the world. Among the two dominant North American economies, Canada and the United States, the latter has been the leading source of foreign direct investment in Mexico. As a matter of fact, up to fifty percent of FDI in the first 9 months of the year 2012 were from United States investors (Bureau of Economics and Business Affairs, 2013). Recently economists have predicted that the auto industry in Mexico is likely to negatively impact Canada, while positively impact the United States. This paper shall explore the statement and discuss the extent to which the benefits and short falls will be experienced by the United States and Canada respectively. Impacts on Canada’s Economy according to Keenan (2014), Canada has continually fallen behind both Mexico and the United States in auto industry over the years. Reduced investment in Canada’s auto industry has seen the investment being redirected towards the Mexican economy. In effect ballooning the Mexican economy and hurting the Canadian economy. Major Investors in the Canadian economy are from the United States, and hence when they transfer their investments to another economy they shatter one and hurt the other, the effect, the Canadian economy is reeling from. Two reasons can be attributable to such an effect, first unlike Mexican labour market, the Canadian market just like the United States labour market is very expensive and therefore employers undergo more operational costs . Secondly, Keenan (2014), remarks that the Canadian dollar has hurt the economy, affecting its competitive position. The Mexican peso has provided not only the United States investors with favorable opportunities to make more profits, but also the Asian and European auto giants. A favorable investment climate, given these macroeconomic inter plays, often places a countries economic agents to either hurt an economy or even improve the other, the effect which has seen the United states benefitting from Mexico’s ballooning auto industry and Canada falling in the same breadth. Though the Canada’s tax structure may be its strong points, the wage pressure has been its main undoing, major American auto industry manufacturers such as Ford and Chrysler have in the recent past threatened to pull their factories out of Canada and move to newer locations that offer better manufacturing conditions.    In an insightful piece, Tence (2013) remarked that the vast growth of the Mexican auto industry and its impact on the Canadian economy can be chiefly attributed to the country’s exchange rate which in turn punishes labour. In effect, when industry moves production from one location to the other, for instance when auto manufactures pull off from Canada and instead move to Mexico, the effect is that Canada will likely have an increasing level of unemployment rate. In economic theory, a high unemployment rate in a country though might have a orthogonal relationship with the inflation rate, but in reality, the former hurts the economy as the country might spend more of their income on welfare allowances. More expenditure on welfare allowance has a negative impact on a country’s revenues an effect that may constrain budget preparation. Impacts on the United States Economy The United States leading role in the provision of FDI to Mexico fundamentally ensures that most of the returns from such investment troops back to the United States. The unrivalled investment, particularly in the auto industry has prompted most of the income earned from investment incursions in Mexico to be realized. As a matter of fact, General Motors is the ending auto manufacturer in Mexico, the dominance of the company in the industry in that country will ultimately ensure that income earned from such investment find their way back to United States of America. Recently, the two nations signed agreements that have mutually improved economic ties between the two countries. Such ties seem to spiral to the betterment of the US economy, having been mostly based on the auto industry. Automotive industry in the United States has been affected to a large effect by a skyrocketing operational cost; such as insurance overheads, labour costs plus other manufacturing overhead costs. Contrastingly, most auto makers that have a parent company in the United States faced lower operational costs and frictional costs when they crossed the border to the Mexico. This implies that the earned higher income from their investments and had a lower maintenance costs because Mexico is quite close and control is fairly easier. Secondly, most of the auto products manufactured in Mexico are sold to markets in the United States, further improving United States economy. Further, the Mexican and the United States have a collaborative structure, a process known as production sharing. This implies that there are parts developed in Mexico and others in the United States, meaning that imports from Mexico are not just imports from other countries, ensuring that tariffs are applied differently, according to the NAFTA agreements (Wilson, 2013). This means that a large part of the dollar spent on imports from Mexico returns to the United States, more than Canada. In fact, most industry analysts have argued that the auto industry relations between Mexico and United States have reduced the two nations to be partners rather than competitors. Conclusion Mexico’s ballooning auto industry has benefitted immensely from the high wage levels in most industrialized nations including United States and Canada. Major vehicle manufactures in the world are United States based and they have been moving their manufacturing base to nations with lower wage pressures such as Mexico. The growing automotive industry in Mexico has the potential to hurt the Canadian and improve the US economy. Canadian skyrocketing dollar value and her expensive labour market has seen the tide favoring Mexico, inform of FDI in the auto industry and its own industry falling, which might impact the economy in terms of increasing unemployment rate. United States economy on the other hand will benefit from the auto industry in Mexico as the investors in the Mexican Industry are mostly US investors. References Bureau of Economics and Business Affairs. (2013). 2013 Investment Climate Statement - Mexico http://www.state.gov/e/eb/rls/othr/ics/2013/204693.htm Keenan, G. (2014). Canada left behind in auto race as U.S., Mexico make gains. http://www.theglobeandmail.com/report-on-business/canada-left-behind-in-auto-race-as-us-mexico-make-gains/article16722514/ Tence, D. (2013). Canadian Auto Manufacturing Faces Collapse, Even As Industry Boom. http://www.huffingtonpost.ca/2013/10/07/auto-manufacturing-canada-collapse_n_4059489.html  Wilson, C (2013). Working Together: Economic Ties between he United States and Mexico. http://wilsoncenter.org/publication/working-together-economic-ties-between-the-united-states-and-mexico Read More